Barrister Professor Rudi Klein provides some timely advice on project bank accounts for scaffolding firms.
It is increasingly likely that scaffolding firms will come across project bank accounts (PBA). That is, they will be asked to agree to receive their payments via a PBA because UK government departments/agencies, all the devolved governments and some councils are now using them. This article explains the benefits to scaffolding firms of being part of a PBA.
What is a project bank account?
A project bank account, or PBA, has been devised to provide a measure of cashflow security for firms in construction supply chains. Once monies are certified as payable by the client, they are paid by the client into a PBA. This is a ring-fenced bank account. The monies in the account are protected by the imposition of a trust; this means that the monies are secure in the event of the insolvency of the main contractor. A trust is rather like garlic to Dracula, the latter being an insolvency practitioner.
Subcontractors on many Carillion projects where there was a PBA in place did not lose money.
How do PBAs work?
PBAs do not disrupt the usual contractual structures. The tier 1 contractor submits its application to the client as usual. The application is, of course, the aggregated amount of the subcontractors’ applications. Once the client has agreed the application, the monies are deposited in the PBA. Within five days, the monies are paid out simultaneously to the tier 1 contractor and its subcontractors.
If the client hasn’t agreed the full amount of the application, there will be a shortfall in the PBA. It’s important to note that a PBA is not a pay-when-paid arrangement (which would, in any event, be unlawful under the Construction Act). The tier 1 contractor is still bound to pay its subcontractors sums which are properly due to them.
The PBA process cuts down the time taken for monies to cascade through the layers of subcontracting.
Highways England is currently the most prolific user of PBAs. By 2020, over £20bn worth of Highways England projects will have been paid for using PBAs. All subcontractors are being paid within 18 days of the assessment date (valuation date) under the tier 1 contract.
The formalities for setting up and operating a PBA are fairly minimal. There has to be in place a trust deed. This has to be signed by the client and tier 1 contractor as trustees of the monies in the PBA and by the beneficiaries of these monies (i.e. the tiers 1, 2 and 3 contractors). A late-appointed subcontractor can sign a joining or accession deed. The trust deed simply confirms that the monies held in the PBA are trust monies intended for payment to the named beneficiaries.
The PBA account holder(s) has to enter into a bank mandate or agreement with the bank. The account holder can be both trustees or, as is often the case, just one of the trustees – the tier 1 contractor. The account holder(s) is then responsible for issuing the instructions to the bank to make the necessary payments. The bank has to be made aware that the monies in the PBA are subject to a trust arrangement.
Project bank accounts (PBA) are the most effective method for achieving cashflow certainty. They ensure that the monies are secure in the event of upstream insolvencies and that regular payments are made within a period that is far less than 30 days.
Has any member of the Scaffolding Association had experience of PBAs and would be happy to provide some details to Rudi Klein? If so, please email firstname.lastname@example.org